Final accounts Flashcards
Final accounts
legal requirement of financial statements that businesses have to fulfil at the end of a particular accounting period
role of final accounts
help with the organisation of the business since they include transactions, revenues and expenses, but also help inform internal and external stakeholders of the business situation
examples of internal stakeholders
shareholders, managers, employees
examples of external stakeholders
the Government, customers, suppliers, the local community etc.
purpose of final accounts for SHAREHOLDERS
Shareholders use the financial performance to decide on whether to keep their shares, sell them or maybe buy more.
They are also interested in the performance of the company’s directors to decide ways of motivation or maybe replace them.
purpose of final accounts for MANAGERS
- interested in the performance of the business for target setting ands strategic planning, alongside the firm’s efficiency
purpose of final accounts for EMPLOYEES
- interested in the performance for “job security” and possible increases in salaries
- could also lead to disputes and creation of unions, if the company is profitable and does not increase the employees’ salaries
purpose of final accounts for the GOVERNMENT
- interested in a business’s profitability for tax purposes
- to verify that the company is following the law
- in cases of big multinational companies, the Government expects an increase in employment
purpose of final accounts for the SUPPLIERS
- interested the the firm’s final accounts to ensure they get paid on time or to grant more credit if necessary
- if the firm has a debt to pay towards suppliers, then they can see if it will be possible to get paid or not
purpose of final accounts for CUSTOMERS
- interest to see if the firm keeps supplying the product
- gives them an idea to continue being customers of the firm or look for alternatives
purpose of final accounts for COMPETITORS
- to compare performances
- to compare sales revenues and level of profitability
purpose of final accounts for FINANCERS
- to verify if the business can pay back loans
purpose of final accounts for the LOCAL COMMUNITY
- if the business is profitable then it might create jobs and improve the living conditions of the local community
- if the business creates environmental issues then it will have. an negative impact on the local community
2 main final accounts
profit and loss account, balance sheet
profit and loss account (aka income statement)
shows the records of income and expenditure flows of a business over a given period of time
divided into 3 parts: a) the trading account, b) the profit and loss account or section, and c) the appropriation account
balance sheet (aka statement of financial position)
a financial statement that outlines the assets, liabilities and equity of a business at a specific point of time
a) the trading account
the first part of the income statement basically shows the difference for the business’s sales revenue and the cost of those sales for the business
a) trading account formulas
gross profit= sales revenue-cost of sales
costs of sales (COGS) = opening stock + purchases - closing stock
cost of goods sold (COGS)
the direct cost of producing or purchasing the goods that were sold during the period
gross profit
difference between costs of goods sold and the sales revenue
b) the profit and loss account (section)
second part of the income statement that shows the net profit before interest and tax and the net profit after interest and tax
Net profit before interest and tax
gross profit - expenses
Net profit before tax
net profit before interest and tax - interest
Net profit after interest and tax
net profit before tax – corporation tax
c) the appropriation account
final part of the income statement showing how the company’s net profit after interest and tax is distributed. This distribution could be either dividends or retained profit.
Retain profit
Net profit after interest and tax - dividends
dividends
the sum of money paid to shareholders decided by the board of directors of a company.
retained profit
the amount of earning left after dividends and other deductions have been made.
assets
items of monetary value that are owned by a business (i.e. cash, stocks, buildings). An asset could belong to a business but that does not mean it is paid for (i.e. a building could be worth a lot of money but its funded by debt). There a 2 types of assets: Fixed assets and current assets.
non-current assets (fixed assets)
long term assets that last more than 12 months (i.e. buildings, machinery, cars, equipment). It is important to take the ‘loss of value’ of the asset into account; this is known as depreciation (i.e. machinery losses its value over time due to its depreciation).
current assets
short term assets that last the firms up to 12 months. This could be: a) cash – money received from the sales of goods and services; b) debtors – money that’s its owned to the business and c) stock – includes raw materials, semi finish goods and finished goods (also know as inventory) .
total assets
non-current assets + current assets
liabilities
refers to a legal obligation of a business to repay its lenders or suppliers, basically what the business owns in debt. They are classified in long-term and current liabilities
non-current liabilities
long terms debts that need to be paid after 12 months (i.e. loans, mortgages)
current liabilities
short term loans that need to be paid before 12 months (i.e. unpaid suppliers, bank overdrafts and tax)
total liabilities
current liabilities + non-current liabilities
net assets
total assets – total liabilities
equity
this shows the value of the business that belong to the owners (it could appear in the balance sheet as shareholders equity) . The Equity shows how the assets were financed
share capital
it refers to the amount of money the firm raised trough the sale of shares when the share were first sold NOT their current market value. In other words, the value of equity in a business that is funded by shareholders, either through an initial public offering (IPO) or via a share issue.
retained earnings
obtained from the profit and loss account it is also called ‘reserves’ since it included fund that were raised in previous years.
equity
obtained from the profit and loss account it is also called ‘reserves’ since it included fund that were raised in previous years.
NET ASSETS
EQUITY
intangible asset
non-physicalassetthat generally has a useful life greater than one year. Even if they do not have physical value they can be very valuable for the business success or failure.
patents
provide a legal protection for inventors preventing their creation is copied for a fixed number of years (normally 20 years). Therefore, it allows the inventor to have exclusive rights to commercial production of their invention for that period of time.
goodwill
refers to the value of a firms’ image and reputation. it could also include the firm’s database, customer base or business connections.
copyright laws
provides legal protection for the original artistic work of musicians, authors, photographers, painters, film producers, etc. They normally last between 50 to 100 years after the death of the creator and anyone who wants to use that work has to seek permission and normally pay a fee.
trademarks
refers to any name, symbol, figure, letter, word, or mark officially registered that identifies a production or a business. If anyone oversteps someone else’s trademark they can be sued. Trademarks normally last for 15 years, are renewable and can be sold.
examples of intangible assets
patents, goodwill, copyright laws, trademarks, symbol, catchphrases,
